Gold and silver prices have tumbled to the lowest level since July amid growing concerns that the US Federal Reserve could be about to start unwinding its massive monetary stimulus program.

Investors are keeping a close watch on United States economic data due out this week – including non-farm payrolls for November and third-quarter gross domestic product figures – for clues about the strength of the US economy. The US central bank has said that it will start scaling back – or tapering – its massive $US85 billion ($93 billion) a month bond-buying program when the US jobs market improves.

In trading on Tuesday in the US, the most actively traded gold contract, for March delivery, fell $US1.10 to close at $US1220.80 a troy ounce on the Comex division of the New York Mercantile Exchange, after tumbling $US28.50, or 2.3 per cent, in trading on Monday night.

Silver for March delivery fell 1.2 per cent to finish at $US19.065 on the Comex. Silver has declined more than 20 per cent from its August high, putting it firmly in a bear market.

Gold, which has dropped about 27 per cent so far this year, appears set to record its first annual loss since 2000. Indeed, the precious metal suffered its heaviest decline in 35 years last month, dropping 5.3 per cent, as investors started to worried that the taper would push up global interest rates and undermine the appeal of gold as a hedge against inflation. The gold price is now down 36 per cent from the record high of just over $US1900 an ounce reached in August 2011 when many investors believed that massive money-printing by the world’s central banks would fuel inflationary pressures.

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Indeed, some analysts warn the weak gold price could be a sign of growing deflationary pressures in the global economy. At the same time, they point out that India’s gold imports have been hard-hit by the new taxes and import restrictions that the Indian government has introduced in order to reduce its yawning trade deficit. And Chinese investors – who were previously restricted to buying locally-listed stocks, domestic real estate and gold – have seen their investment options widen as Beijing loosens its capital controls.

Confronted with a steep decline in the gold price, which has coincided with a strong rally in global equity markets, many investors have thrown in the towel, and sold their holdings in gold-backed exchange-traded funds (ETFs).

In total, ETF investors sold an estimated 700 tonnes of gold in the first nine months of 2013 – or the equivalent of about a third of global mine production of the metal in the same period. There are fears that the sell-off may intensify if the gold price falls further because many investors bought into ETFs when the gold price was between $US1200 and $US1300 an ounce and are now suffering losses on their investments, which could cause them to liquidate.

Last month,
Goldman Sachs
Group repeated its forecast that the gold price would fall to $US1050 next year and Goldman’s head of commodities research, Jeffrey Currie, has warned there’s a risk that gold prices could overshoot to the downside.